Spain’s next market test: banks

Yet even more from Spain. At 6 p.m. Central European Time (provided there’s no repeat of Thursday’s budget delay), the long-awaited results of detailed bank stress tests by independent auditors will be revealed.

What’s it all about? The government agreed to the stress tests, or a test of the sector’s stability, as part of a €100 billion ($129 billion) bailout of the sector announced in June. It’s also a precursor to the formation of a bad bank, where the government will drop toxic assets. A top-down set of tests, als0 in June, said Spanish banks need up to €62 billion to cover bad loans due to the collapsed housing market.

Results today will show the individual needs of the 14 banks tested.

Analysts expect nationalized banks like Bankia and NovaGalicia to suck up around two-thirds of the bailout money.

Why it matters? If the final figure is too much lower than €60 billion, the market will question its credibility. Too much higher will ring alarm bells.

“We should care about them enormously as Spain urgently needs a definitive bank cleanup framework. The external audit is a key element in this process. The problem is that Spanish bank restructuring is something of a moving target given the severity of the downturn,” said Nicolas Spiro, managing director of Spiro Sovereign Strategy.

One more thing: Moody’s Investors Service is expected to announce its review of Spanish debt any time now, and could cut it to junk any time after the stress-tests announcements, which would be “symbolically and psychologically damaging”, driving borrowing costs higher, said Spiro.

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